Understanding Basel III, What is different after September 2013

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Stay informed with our FREE newsletter, subscribe here. However, in line with the SA-CCR framework, the effect of margining would continue to be reflected in the potential shorter time horizon or margin period of risk MPOR , ranging between 5 and 20 days, depending on whether the transaction is margined and centrally cleared as well as on the size of the netting set.

However with the supplementary leverage ratio SLR , there is now a new constraint.

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Showing SLR of 7. Next the component breakdown. Showing SLR of 6.

This should include gathering additional, more granular data and undertaking further analysis beyond what was provided in the QIS. In particular, we would recommend conducting analysis of data grouped by the market-defined asset classes of the underlying exposures rather than according to the regulatory exposure categories. Further consideration should also be given to additional analytical work provided by the industry and referred to in the Joint Associations' comment letter dated 24 March Comment Letter.

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These data are limited as explained in the Report, and the Report should be read and understood in that context. It is especially important to note that the Report does not advocate or support a particular calibration method or outcome, and in particular we do not intend that any of the implied p-values set out in the report should be used to calibrate the revised framework. Rather, the Report reveals a number of results that we respectfully ask the Committee to consider as they continue to work on the proposed revisions.

The industry believes that the Sensitivity Based Approach SBA , as put forward by the BCBS, constitutes a significant improvement to the previous version of the methodology and is in line with industry recommendations on leveraging upon existing validated risk metrics to calculate the market risk capital requirements. The Advanced Cash Flow Approach ACFA methodology, on the other hand, is not computationally supported by existing infrastructure, since cash flow data are not captured at the trade level. As a result, industry members would require extensive resources to adhere to currently proposed regulatory timelines whilst achieving little in terms of enhancing the risk sensitivity of output metrics.

This would be particularly onerous for smaller organizations. GFMA requests that the Committee engage in a similar way with the industry in this, relatively new, context of the NSFR in order to achieve a treatment of high quality securitisation that accurately recognises its strong credit performance through and since the financial crisis as well as its benefits as a self-liquidating funding tool for the real economy. The groups welcome the development of a simpler and more straightforward hierarchy of approaches, some reduction of risk weights for higher credit quality exposures, including reduction of the risk weight floor, recognition of credit protection provided by excess spread, preservation of existing flexibility in application of the Internal Ratings-Based Approach IRBA , preservation of the Internal Assessments Approach IAA , and requiring one rather than two qualifying credit ratings for application of the External Ratings-Based Approach ERBA.

However, the groups believe that the proposed capital requirements for securitisation exposures, especially for higher quality exposures and for medium-term and longer-maturity transactions, remain much higher than justified by historical loss incidence in most asset classes, by comparison with other methods of finance or in relation to the capital requirements of the underlying asset pools. These excessive capital requirements will discourage banks from investing in or otherwise acquiring exposure to securitisation transactions.

Information relating to the capital adequacy framework in New Zealand

The groups recommend specific changes to certain of the modelling assumptions and parameters used in formulating and calibrating the approaches, as well as changes to the operating conditions for certain approaches and to the risk weight floor and capital cap provisions. This letter addresses important developments related to implementation and global consistency of the G20s regulatory reform agenda which may risk divergence from consistent implemention.

The groups believe the Consulative Document is a significant step in the right direction and believe that the proposed non-internal model method NIMM framework has great potential. However, the industry feels an articulation of supervisory standards for the definition of effective notional that will allow firms to reliably and consistently apply NIMM to the vast majority of derivative structures is important.

We urge the Basel Committee to articulate these standards to help ensure global consistency and a level playing field, facilitating an effective application of NIMM. The Discussion paper steps back from the significant regulatory reforms introduced by the Basel Committee and member jurisdictions to consider the resulting complexity in capital adequacy requirements as well as the comparability of capital adequacy ratios across jurisdictions.

Basel III: New Regulatory Requirements

In its current form, however, the Proposed Framework would greatly increase the denominator of the Basel III leverage ratio the Exposure Measure by adopting measurement methodologies that the Associations believe would significantly overstate actual economic exposure. If adopted in this form, the Exposure Measure is far more likely to result in the leverage ratio, rather than the risk-based capital ratio, becoming the binding capital measure for a substantial number of banks. Moreover, for banks where the leverage ratio does not become the binding ratio immediately, the very real prospect of it becoming binding in the future or after a stress test will cause these institutions to change their behavior as if it were binding.

As a result, institutions will reduce their participation in core financial activities and markets that are critical to the smooth functioning of the financial system. GFMA believes that the current Basel III wording will unintentionally restrict banks' ability to provide liquidity and carry out market making activities, and therefore ask the BCBS to reconsider the requirement. GFMA shares concerns that as the implementation phase begins for many of these regulatory reform initiatives, however, instances of divergence from agreed frameworks have increased.

Some jurisdictions have also adopted or are considering additional reforms beyond international consensus e. This resulted in the clear paradox that two insurance undertakings showing on the liabilities side the same riskiness are required to hold the same capital for supervision purposes despite clearly differing on the assets side in terms of the riskiness of their investments. The need to remedy the said limitations spurred European legislators to initiate an in-depth review of the system for supervision of company solvency in insurance undertakings, with a view to comprehensive innovation of the supervisory prudential rules in order to ensure a level playing field within the insurance sector and create a new, risk-oriented regulatory framework Solvency 2 [ 11 ].

Regulators believe that under crisis banks may temporarily reduce the ratio to 4.

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The new Basel III regulatory framework increases the importance of the risk management process, which includes risk assessment. Indeed, risk assessment is a strategic phase of the risk management process. However, new developments in financial markets, financial management practices, operational complexity, and supervisory approaches and rules Basel II have, over the last decade, created new risks, cross-type risks, interrelation between traditional risks such as counterparty risk, credit risk, market risk, operational risk, and liquidity risk and increased the importance of the risk management process, infrastructure, and governance.

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All this has presented the risk management function with a great challenge. Risk assessment is an extremely critical phase of this process and should cover the major sources of financial intermediaries. In this perspective, the EBA guidelines recommend that financial intermediaries prepare a list of risk categories and subcategories covered by ICAAP, including their definitions and parameters of individual risk categories, a description of their approach to the identification of risks including risk concentrations and the inclusions of identified risks within risk categories and subcategories to be covered.

On evidencing the implementation of the scope, the general objectives, and the main assumptions underlying ICAAP, competent authorities should ensure that they receive from institutions the following: a list of risk categories and subcategories covered by ICAAP, including their definitions and perimeters of individual risk categories; b explanations of the differences between the risks covered by ICAAP and the risk appetite framework, where the scope of risks covered is different; and c description of any deviations in the ICAAP process and in the key assumptions within the group and the entities of the group, where appropriate.

However, the goal of alignment and coherence constraint remains an aspiration for many undertakings because it requires a holistic approach to bank governance.

In this perspective, it is important to understand the way in which undertakings perform their risk assessments. There is no single approach for all banks because they usually have different business models, strategies, capital and liquidity buffers, operational complexity structures and governance, and, therefore, different risks. In general terms, the risk map should be: exhaustive, transparent, consistent, and well-integrated into the business model holistic approach. Firstly, the assessment should include all risks to which undertakings are or could be exposed principle of exhaustiveness.

This should include difficult-to-measure risks such as compliance risk and reputational risk. Secondly, the methodology used to assess and measure exposure should be duly documented together with the assumptions used during the risk assessment process principle of transparency. Faced with these procedural principles, we might ask ourselves: which risks do undertakings consider in their assessments?

In the case of smaller banks, in general, the types of risk classified as key risks often comprise only credit risk, market risk, and operational risk, and supervisory risk measurement methods are also deployed internally to measure these risks. However, undertakings should, as a minimum, take into account in their assessment the risks recommended by the regulator or supervisory authority. In the opinion of the European Central Bank ECB [ 15 ], it is important to map at least the following risks: a credit risk, b market risk, c operational risk, d interest rate risk in the banking book, e participation or equity risk, f sovereign risk, g pension risk, h funding risk, i risk concentrations, and j business and strategic risk.

In the case of conglomerates and for material participations e. This means, for example, that a bank which considers country risks to be immaterial will subsequently avoid taking on material country risks, that is, the bank will keep activities such as proprietary transactions in foreign securities, interbank trading with international counterparties, or loans to foreign borrowers to a minimum.

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This is in order to reduce overlap between businesses and the associated operational inefficiencies, to develop forms of collaboration orientated toward the pursuit operational synergies, and to achieve greater impact during the risk measurement, management, and control phases. This is also a cultural change whose driving force is the risk management function, called upon to perform a role of proactive consultancy in all areas of decision-making and of fruitful dialog with the operational functions.

In this regulatory and market context, there is a significant risk, for banking intermediaries, of being subjected to the numerous rules and chasing regulatory compliance without succeeding in germinating the seed of change planted in the new vision for the regulatory and supervisory system. This is not merely a philosophical stance but, rather, a mindset that marks a moment of significant discontinuity with the past permeating entire banking undertakings capable of setting aside cultural resistance to change and waving of ideological flags.

Qualifying capital

It is an approach that integrates and synergizes:. The different regulatory frameworks, often managed and implemented in silos by banking intermediaries;. Risk management under normal and stressed conditions, in line with a backward- and forward-looking vision;. From , over countries worldwide had implemented Basel I. From , the Basel Committee country membership expanded to include 27 Members, emerging countries such as Argentina and India as well.

Although the Basel accords are intended for implementation by internationally active banks and in developed economies, other economies and, therefore, emerging are also forced to implement the accords due to international regulatory and competitiveness matters. For example, in Asia, at least nine countries had implemented or expected to implement Basel II by e.

Risk assessment is normally formalized by the risk management function which, based on the evidence provided by the other, second-level control functions internal auditing, compliance, and actuarial function , and on the findings of the control activities carried out by the business functions responsible for management of the above-mentioned risks, highlights their presence and provides a quali-quantitative assessment of them. As we have already stated, adoption of the regulatory requirements of Solvency 2 is not limited simply to application of a new capital requirement calculation methodology and new accounting standards but, rather, requires significant adjustments in terms of corporate governance and organization.

It is therefore necessary for boards of directors to increase their interest in and understanding of the risk profiles inherent in the business of their undertakings. In this regard, the introduction of a risk-based capital requirement system is intended to underline the importance of the risk management function and internal control systems [ 19 ]. Continuing with our analysis of the innovations introduced by the new regulatory framework, it is essential that we underline a further and important innovation, namely consideration of a broader and more complete range of risks for the purpose of calculating capital requirements as well as quantifying these more accurately.

Understanding Basel III, What is different after September 2013

Understanding Basel III, What is different after September 2013

Understanding Basel III, What is different after September 2013

Understanding Basel III, What is different after September 2013

Understanding Basel III, What is different after September 2013

Understanding Basel III, What is different after September 2013

Understanding Basel III, What is different after September 2013

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